GMéxico Transportes, S.A.B. de C.V.'s (BMV:GMXT) Financials Are Too Obscure To Link With Current Share Price Momentum: What's In Store For the Stock?

GMéxico Transportes. de (BMV:GMXT) has had a great run on the share market with its stock up by a significant 19% over the last three months. However, we wonder if the company's inconsistent financials would have any adverse impact on the current share price momentum. Specifically, we decided to study GMéxico Transportes. de's ROE in this article.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

Check out our latest analysis for GMéxico Transportes. de

How Is ROE Calculated?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for GMéxico Transportes. de is:

13% = Mex$7.7b ÷ Mex$61b (Based on the trailing twelve months to December 2020).

The 'return' is the profit over the last twelve months. One way to conceptualize this is that for each MX$1 of shareholders' capital it has, the company made MX$0.13 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of GMéxico Transportes. de's Earnings Growth And 13% ROE

On the face of it, GMéxico Transportes. de's ROE is not much to talk about. Although a closer study shows that the company's ROE is higher than the industry average of 7.2% which we definitely can't overlook. Still, GMéxico Transportes. de's net income growth of 3.3% over the past five years was mediocre at best. Remember, the company's ROE is quite low to begin with, just that it is higher than the industry average. Therefore, the low growth in earnings could also be the result of this.

We then compared GMéxico Transportes. de's net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 5.8% in the same period, which is a bit concerning.

Earnings growth is an important metric to consider when valuing a stock. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). Doing so will help them establish if the stock's future looks promising or ominous. If you're wondering about GMéxico Transportes. de's's valuation, check out this gauge of its price-to-earnings ratio, as compared to its industry.

Is GMéxico Transportes. de Making Efficient Use Of Its Profits?

With a high three-year median payout ratio of 69% (or a retention ratio of 31%), most of GMéxico Transportes. de's profits are being paid to shareholders. This definitely contributes to the low earnings growth seen by the company.

In addition, GMéxico Transportes. de has been paying dividends over a period of three years suggesting that keeping up dividend payments is way more important to the management even if it comes at the cost of business growth. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 46% over the next three years. As a result, the expected drop in GMéxico Transportes. de's payout ratio explains the anticipated rise in the company's future ROE to 16%, over the same period.

Summary

In total, we're a bit ambivalent about GMéxico Transportes. de's performance. On the one hand, the company does have a decent rate of return, however, its earnings growth number is quite disappointing and as discussed earlier, the low retained earnings is hampering the growth. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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